Every graduate student of economics learns, early in her career, that markets work well. The idea that ‘markets work well’ has a well defined meaning: allocating resources by buying and selling goods in free markets does at least as well as any other way of allocating them. Let me be more precise.

A society, to an economist, is a bunch of people and a bunch of goods. A good is something that people want. For example, a ticket to see the latest Star Wars movie is a good. A bottle of Beaujolais is a good: and so is a banana. I could go on. But the basic idea here is that everyone in society has preferences over different bundles of goods. I personally would prefer a bottle of Beaujolais and a banana to a trip to the movies: but you may rank things differently.

Sunday, December 20, 2015

Since 2009, Scott Sumner has been a big proponent of nominal GDP targeting. He sees nominal wages as slow to adjust and he has sketched a simple model, the musical chairs model, to explain why his policy should be adopted.

I am a new convert to these arguments. That is my loss. I had assumed, incorrectly, that
Scott was proposing that central banks should simply adjust the coefficients on
their interest rate policies, so called Taylor Rules, to raise the nominal
interest rate when nominal GDP growth is above target and to lower it when nominal
GDP growth is below target.I will refer to that variant of NGDP targeting, as
growth rate targeting. An alternative, NGDP level targeting, would make these interest
rate adjustments in response to deviations of nominal GDP from a target growth
path. For an elaboration of that view, see, for example, the article by Evan Koenig, Vice President of the Dallas Fed.